Dow Struggles to Hold 26,000 as Tame Inflation Rocks Bull Rally

The Dow and broader U.S. stock market deflated on Wednesday after government data showed another slide in consumer inflation for the month of May, raising the prospect of an imminent rate cut by the Federal Reserve. While rate cuts are usually seen as a boon to stock investors, they also point to a weakening economy that cannot stand on its own two feet.

Dow Slides; S&P 500, Nasdaq Follow

All of Wall Street’s major indexes headed for losses on Wednesday, extending their weak performance from the previous session. The Dow Jones Industrial Average declined by as much as 90 points before paring losses. It closed down 43.68 points, or 0.2%, to 26,004.83.

Dow Jones
Dow Jones Industrial Average briefly falls below 26,000 on Wednesday. | Source: Stockcharts.com

The big banks were among the Dow’s worst performers. Shares of Goldman Sachs Group Inc. (GS) declined more than 2%. JPMorgan Chase & Co (JPM) fell 1.7%.

The broad S&P 500 Index of large-cap stocks declined 0.2% to 2,879.85, with most of the losses concentrated in energy and financials stocks.

Meanwhile, the technology-focused Nasdaq Composite Index fell 0.4% to 7,792.72.

Oil Selloff Intensifies

Commodity stocks were rocked by a steep selloff in the oil markets on Wednesday as U.S. crude futures plunged toward $50 a barrel.

Oil prices declined sharply after U.S. government data showed an unexpected rise in commercial crude inventories, sending a strong signal that the market was headed for oversupply.

U.S. commercial crude inventories rose by 2.206 million barrels in the week ended June 7, the Energy Information Administration (EIA) reported Wednesday. Analysts in a median estimate were calling for inventories to fall by 481,000 barrels.

Crude oil is back in a bear market, with U.S. crude futures plunging some 22% from their April peak. On Wednesday, West Texas Intermediate (WTI) fell $2.21, or 4.2%, to $51.06 a barrel on the New York Mercantile Exchange. Brent crude, the global crude benchmark, fell $2.49, or 4%, to $59.80 a barrel.

US Crude Futures
U.S. West Texas Intermediate (WTI) futures fall back into bear market territory. | Source: Barchart.com

Tame Inflation Puts Pressure on Fed

Consumer inflation deteriorated further in May, possibly giving the Federal Reserve more justification to lower interest rates in the near future.

The consumer price index (CPI) of goods and services nudged up 0.1% in May, which translated into a year-over-year gain of 1.8%, the Department of Labor reported Wednesday. Analysts had called for a monthly gain of 0.2% and an annual increase of 2%.

So-called core inflation, which excludes volatile items such as food and energy, rose 0.1% on month and 2% annually, official data showed.

Weak inflation gives the Federal Reserve more leeway in lowering interest rates – a move that would mark a significant departure from the policy regime headed first by Janet Yellen and then later Jerome Powell. Traders believe a July interest rate cut is extremely likely, according to CME Group’s FedWatch Tool. At last check, Fed Fund futures prices implied a more than 76% chance of a cut next month.

The Fed will hold its next policy meeting on June 18-19 in Washington where no changes are expected.

Featured image courtesy of Shutterstock. Charts via Stockcharts.com and Barchart.com. 

Author:
Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi